Healthcare's Hidden Strength: Why Medical Device Funds Keep Outperforming Despite Washington's Cuts

A Sector That Refuses to Buckle

When the U.S. government slashed over $1 trillion in healthcare spending during 2025—marking the most aggressive federal pullback in modern history—analysts braced for sector-wide devastation. Add tariff pressures threatening 250% duties on imported pharmaceuticals and devices, and the outlook seemed grim.

Yet something remarkable happened: the healthcare symbol remained resilient. The State Street Health Care Select Sector SPDR ETF (XLV) climbed 13% year-to-date, nearly keeping pace with the S&P 500’s 17% gain. How does an industry absorb historic headwinds and still advance?

Demographic Destiny: Why Healthcare Never Goes Out of Style

The answer lies in math that Washington can’t legislate away. With 61 million Americans now aged 65 or older—and the global population of those 60+ projected to hit 2.1 billion by 2050—healthcare demand remains non-negotiable. This isn’t cyclical; it’s structural.

Unlike industries tied to economic cycles, medical care transcends economic conditions. Whether recession hits or markets surge, aging populations need treatments. This immutable reality is why seasoned investors call healthcare the “forever industry.” The sector moves to demographic rhythms, not political whims.

The Opportunity Window Ahead

The worst headlines have already hit. Looking into 2026, the narrative will likely shift from “historic cuts” to “stabilization ahead.” Midterm elections create political incentive to extend health insurance subsidies before premiums spike for voters. Trump administration tariff exemptions, already granted to Pfizer, could expand to other healthcare companies. Supreme Court challenges to tariffs add another reversal possibility.

Translation: today’s pessimism is setting up tomorrow’s recovery.

One Fund Built for Long-Term Wealth Creation

Among sector plays, the Fidelity Select Medical Technology and Devices Portfolio (FSMEX) stands apart—particularly for income-focused investors.

Down 2.5% year-to-date while the sector rose, it sits undervalued. The portfolio houses 64 medical device companies, anchored by titans like:

• Boston Scientific (BSX): 12% of holdings; 13,000+ products reaching 44 million patients globally; 20% net sales growth last quarter
• Abbott Laboratories (ABT): Diabetes and cardiovascular focus; Dividend King with 51 consecutive annual hikes
• Stryker (SYK): Neurotechnology and orthopedics leader serving 150 million patients; just announced its 33rd dividend increase

The Income Story That Changes Everything

Here’s what separates FSMEX from passive healthcare tracking: distributions.

The fund doesn’t pay regular dividends, but its 2024 payout of $5.96 per share yielded 9% for early-year buyers. 2025 distributions hit $4.67 per share, delivering 7.5% yield—a stark contrast to the S&P 500’s anemic 1.14% average yield.

That income stream exists because the portfolio concentrates in proven dividend payers—companies willing to return capital to shareholders consistently.

Historical Performance: The Track Record Matters

Since launching in 1998, FSMEX has averaged 13% annual gains versus 8.9% for the S&P 500. That’s not accident; it reflects the compounding power of quality medical device makers combined with their prolific income distributions.

When you reinvest those 7-9% yields into capital appreciation running at 13% annually, compound returns accelerate dramatically.

Why Now?

The fund’s recent underperformance represents opportunity, not weakness. As sector pressures ease—tariff relief, subsidy extensions, improved regulatory sentiment—FSMEX’s diversified portfolio of 64 device makers will benefit proportionally. Simultaneously, falling interest rates make its 7%+ yield increasingly attractive relative to alternatives.

The healthcare sector’s resilience, proven across 2025’s worst conditions, combined with this fund’s commanding income and historical alpha, creates a rare alignment: deep value in a structurally protected industry.